Fitch Affirms Macy's, Inc.'s IDR at 'BBB'; Outlook Stable

April 17, 2014 05:09 PM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Macy's, Inc. (Macy's) and
Macy's Retail Holdings, Inc. (MRHI), including the long-term Issuer
Default Rating (IDR) at 'BBB' and short-term IDR at 'F2'. The Rating
Outlook is Stable. A full list of rating actions follows at the end of
this release.

KEY RATING DRIVERS

The ratings reflect Macy's strong and growing market share of the
department store sector, above-average operating margins, strong free
cash flow (FCF) and stable credit metrics. Fitch expects Macy's will
continue to take market share in the near- to intermediate-term,
although long-term secular trends in the department store space remain
negative and the decline in mall traffic has accelerated.

Leading Position in Middle Market: Macy's is well-positioned in the
traditional department store space, which has seen a lot of
consolidation over the past decade. The company's comps trends have
outperformed the department stores under Fitch's coverage by an average
of over 200 basis points (bps) over the past three years (on a sales
weighted basis), clearly indicating the company's strong position as a
market share gainer. Macy's strong operating momentum has benefited from
its 'My Macy's' localization, omnichannel offerings (Fitch estimates
internet sales currently account for more than 10% of total sales), and
MAGIC selling strategies.

Macy's share of the department store segment has grown to 15.7%, gaining
an additional 3.4% of the market after being relatively stable at around
12.3% (using NAICS codes for department store industry sales) over
2006-2009. Fitch expects Macy's will continue to take market share over
the next three years on top-line growth of 2%-3% relative to Fitch's
industry growth expectation of minus 1% to minus 2%.

Looking at the overall domestic apparel, accessories, and home-related
categories, Fitch expects a market consolidator would need to generate
top-line growth 2% or above to ward off competition from other channels
such as specialty, discount, and online. This could be achieved by
relatively flat to modest comps growth at the store level and mid-teens
growth from online sales, which would contribute roughly 200 bps to
overall comps.

As a result, Fitch expects Macy's will continue to outperform its
department store peers and maintain or modestly grow its share of the
overall domestic apparel, accessories, and home-related categories in
the near- to intermediate-term.

Stable Credit Metrics: Macy's generates above-average operating margins,
with EBITDA margin expansion of over 100 bps over the last three years
to 13.8% on strong top-line growth. Adjusted debt/EBITDAR was at 2.3x at
the end of 2013 and Fitch expects adjusted debt/EBITDAR to remain in the
mid-2.0x over the next two-three years, assuming low single-digit growth
in comps and EBITDA.

Liquidity remains strong, supported by a cash balance of $2.3 billion as
of Feb. 2, 2014. Macy's liquidity position is also supported by its $1.5
billion unsecured credit facility due in May 2018.

Macy's annual FCF has averaged more than $1 billion over the past four
years and Fitch expects the company to generate annual FCF in the range
of $1 billion to $1.2 billion over the next three years. Capex is
expected to be in the range of $1.1 billion in the next two to three
years as the company invests more in its store base and continues to
fund growth-related initiatives. Macy's currently no longer needs to
funds its pension plan due to its fully funded status at the end of 2013.

Fitch expects the company to refinance upcoming debt maturities and
manage share buybacks within the context of maintaining its targeted
adjusted leverage of 2.4x-2.7x.

RATING SENSITIVITIES

A positive rating action could result if Macy's comps outperformance and
share gains against the increasing pricing competition and promotional
pressure in the middle market continue and it maintains leverage in the
low 2.0x range.

A negative rating action could result in case of a return to negative
same-store sales trends and/or an aggressive financial strategy leading
to leverage metrics increasing to above 3.0x.

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